Martin Sullivan resigns amid subprime losses

NEW YORK (Reuters) - American International Group AIG.N Chief Executive Martin Sullivan on Sunday bowed to investor demands, stepping down in the face of increasing calls for his departure, as losses from risky subprime mortgage investments mounted.

AIG installed Robert Willumstad, a former Citigroup Inc executive, to replace Sullivan.

Sullivan’s departure, after only three years on the job, comes after AIG in February and May posted two consecutive quarters of record losses, stemming from about $20 billion (10.2 billion pounds) in write-downs in the market value of assets linked to subprime mortgages, tarnishing Sullivan’s reputation.

The U.S. Securities and Exchange Commission is investigating whether the insurer overstated the value of these investment contracts, held by a financial products unit.

In stepping down, Sullivan joins a growing list of Wall Street executives, including Citigroup's C.N Charles Prince, and Merrill Lynch & Co's MER.N Stan O'Neil, who have lost their jobs as risky subprime investments took a toll on each corporation's bottom line.

For Sullivan, it is a fairly abrupt turn of events -- in his first year as CEO he won widespread investor support by bringing AIG through a rough regulatory probe.

He continued to build on that with AIG, the world’s largest insurer, posting record adjusted net income for 2006 and early 2007. But he fell out of favour with investors in recent months, as unrealized losses from the mortgage investments mounted.

The large losses, and a precipitous drop in AIG’s share price, led several large shareholders to push for Sullivan’s ouster.

Former director Eli Broad and fund managers Shelby Davis of Davis Selected Advisers LP and Bill Miller of Legg Mason LM.N wrote in a letter obtained by Reuters last week that "significant and immediate changes at both the management and board level are clearly called for."

The same group sent another letter to the board last month, also expressing concern over Sullivan’s management.

AIG’s shares have fallen by more than half over the past year, closing at $34.18 on Friday. The shares were trading at $72.91 a year ago.

Separately, from the other dissident group, former chief executive Maurice “Hank” Greenberg, who remains a large AIG shareholder, has also been critical of management, sending his own letter to the board in early May, outlining a series of gripes.

He used the roughly 12 percent stake he controls through shares he owns, family trusts and stock owned by companies he runs, to vote against AIG’s board at the time of the insurer’s annual meeting last month.

Greenberg had once been a mentor to Sullivan, but their relationship grew frosty after Greenberg’s departure, and has deteriorated since, with a nasty string of lawsuits outstanding between the two sides.

Sullivan, an Englishman known for being quick with a joke and for his shock of white hair, departs AIG after a 36-year career dating back to when he took up a clerk’s post in the insurer’s London offices at the age of 17.

He moved to New York in 1996, then worked his way up into AIG’s executive suite through long hours and hard work. In 2002, he was named co-chief operating officer of the company, along with Edmund Tse. That put him in line as a possible successor to Greenberg.

Around the same time, Sullivan married Antoinette, his second wife. He has two grown daughters, Lindsey and Katie, from his first marriage.

In Sullivan’s first year in the CEO office, he ushered AIG through a painful, costly regulatory probe, paying $1.64 billion to settle state and federal investigations that alleged accounting improprieties, and oversaw a five-year restatement to fix overstated income discovered as part of AIG’s own inquiry.

Greenberg is still fighting civil charges stemming from that probe, by then-New York state Attorney General Eliot Spitzer and the U.S. Securities and Exchange Commission.

Sullivan is due a severance payment of $35 million as long as his departure is not “for cause,” $20 million more than the severance benefit he was initially promised when he was named CEO in 2005.

Reporting by Lilla Zuill; Editing by Jonathan Oatis